Market Insight Monthly | July 2019

ECONOMY: CONSUMERS PROPEL U.S. ECONOMY IN JULY

Consumers showed signs of strength in July’s U.S. economic data.

Leading indicators fell month over month for the first time in 2019. Still, the Conference Board’s Leading Economic Index (LEI) rose 1.6% year over year in June. Even though leading indicators have slowed recently, the LEI continues to expand year over year, signaling future economic growth.

Gross domestic product (GDP) increased 2.1% in the second quarter, bolstered by consumer spending’s 2.9% contribution to growth. Government spending added 0.9%, its largest contribution since 2009. Trade and inventories subtracted 1.5% from overall growth, after adding a similar amount in the first quarter, while business spending was a slight drag on growth in the quarter.

The June jobs report, released in early July, showed nonfarm payrolls rebounded after a weak May [Figure 1]. The 12- month average pace of payroll gains remained in line with the expansion average.

The pace of consumer inflation picked up for the first time in seven months. The core Consumer Price Index, which excludes food and energy, increased 2.1% year over year in June, higher than the 2% rate of growth in May. Core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.6% year over year in May, below policymakers’ 2% target.

Average hourly earnings rose 3.1% year over year in June, an eight-month low. Wage growth has moderated in recent months, but it has remained at a level that should continue to support consumer spending without concerns of overheating. Growth in the core Producer Price Index (PPI), which excludes food and energy prices, grew 2.4% year over year, the slowest pace in 11 months.

U.S. manufacturing deteriorated further, caving to a global trend of weakness in the sector. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, fell to 51.7, matching its lowest point since October 2016. Markit’s PMI ticked up slightly in June, but preliminary data showed the gauge fell to 50 in July, the threshold between expansionary and contractionary territory.

Consumer sentiment and spending both increased, hinting that the U.S. consumer could continue to buoy growth. The Conference Board’s Consumer Confidence Index posted its third-highest reading of the economic cycle in July. Retail sales climbed for a fourth straight month in June.

Still, corporate sentiment floundered. The National Federation of Independent Business’s measure of business confidence dropped for the first time since January. Year-over-year growth for new orders for nondefense capital goods fell to an eight month low in May, suggesting that trade tensions are still hampering business spending.

Fed Cuts Rates, Ends Balance Sheet Runoff

The Fed announced a 25-basis point (0.25%) rate reduction July 31, its first in 10 years [Figure 2].The Fed also said it would end its asset sales on August 1, instead of in October, in order to align its balance sheet and rate policies.

Powell repeated his positive rhetoric on the U.S. economic outlook, going so far as to say he doesn’t see any economic sector posing a near-term threat to growth. He pointed out that consumer inflation was slowing, but added that the decision to lower rates was based on several factors, including slowing growth internationally and trade uncertainty.

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